Phorgy Phynance

WSJ: Seeking Hidden Losses, Regulators Comb Books Of Wall Street Titans

with one comment

This is bound to end up badly.

From the Wall Street Journal:

Seeking Hidden Losses, Regulators Comb Books Of Wall Street Titans

Here are some excerpts (my emphasis in bold):

The SEC is looking into whether Wall Street brokers are using consistent methods to calculate the value of subprime-mortgage assets in their own inventory, as well as assets held for customers such as hedge funds, the same people said. The concern: that the firms may not be marking down their inventory as aggressively as assets held by clients.

[snip]

… few big Wall Street firms have reported big subprime losses despite the turmoil roiling the markets.

[snip]

No one really knows how to price asset-backed securities and CDOs and that’s a real problem in the market now,” says Ann Rutledge, principal of R&R Consulting, a structured finance consultancy in New York.

[snip]

The pricing issue is crucial for brokers and banks, some of which hold significant amounts of mortgage or CDO securities on their books. Analysts said it was common in past years for Wall Street underwriters to keep portions of the securities of CDOs or mortgage bond deals they arranged.

The SEC’s market-regulation division has been in touch with all big brokerage firms to ensure their risk-management systems are up to speed in light of the quick deterioration in the subprime market. The asset-pricing inquiry is being conducted by the agency’s office of compliance, inspections and examinations.

This is all part of a bigger picture we are discussing here

Some of the best quants in the world are hotly debating appropriate methods for pricing CDOs. When I hear their arguments, the only conclusion I can come to is that NOBODY KNOWS how to price these things. If you can’t price them to determine the value of fund shares and if you can’t value them for GAAP accounting and if you can’t price them for the purposes of allocating capital for risk management purposes, then what does that mean? It means people have been flying blindfolded for years. Who knows where we will end up, but my suspicion is that the place will not be pretty.

Oh yeah, don’t forget I’m an optimist 😉

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Written by Eric

August 10, 2007 at 10:20 am

One Response

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  1. I have been following up on financial engineering and have a number of posts on it since August.

    Independent Accountant

    December 27, 2007 at 12:04 pm


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